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Thursday August 28, 2014

Washington News

Washington Hotline

Koskinen Warns of IRS Problems

Speaking to the National Society of Accountants (NSA) in Baltimore on August 21, IRS Commissioner John Koskinen warned of future IRS problems. The two primary challenges for the IRS are budget cuts and tax extenders.

The House of Representatives Appropriations Committee has proposed a $1 billion reduction in IRS funding. Koskinen stated, “People don’t vote for me – they vote for members of Congress. Congress needs to hear and understand the impact of the funding cuts. As I tell people on Capitol Hill, we are the only agency still operating at the post-sequester level.”

Koskinen explained that our tax system is built on the principle of voluntary compliance. He continued, “Congress is starving our revenue-generating operation. If voluntary compliance with the tax code drops by 1%, it costs the U.S. government $30 billion per year. The IRS annual budget is only $11 billion per year.”

Koskinen expressed appreciation to NSA for a letter to the House Appropriations Committee opposing the IRS cuts. The IRS has already reduced call center employees by 5,200. In 2013, the IRS was able to respond to 71% of phone requests for assistance. With the reduced number of call center employees, Koskinen estimates that the response rate will decline to 60% this year.

A second major issue for the IRS is the tax extenders bill. Both the House and the Senate have not completed work on their respective versions of the bill. Therefore, it now is very probable that there will not be a completed tax extenders bill until November or even December. Because the IRS computers cannot be programmed until the President signs a bill, there may be delays in the ability of the IRS to process the 2014 tax returns.

Koskinen concluded, “Congress needs to understand that the later these are passed and the more complicated they are, the more challenging it is for taxpayers to file accurate returns on time.”

Ryan Supports Charitable Deduction, But Caps Mortgage Deduction

In a national media interview on August 20, House Budget Committee Chairman Paul Ryan (R-WI) discussed the mortgage interest deduction and the charitable gifts deduction.

The current Ways and Means Chairman Dave Camp (R-MI) is retiring at the end of this year. Earlier in 2014, Camp published a comprehensive tax reform draft bill. The bill included a cap on the mortgage interest deduction. The existing amount that qualifies for the interest deduction would be reduced from $1 million to $500,000 for a married couple and $250,000 for a single person.

Ryan indicated that he felt this was an appropriate change. The mortgage interest deduction was intended primarily to benefit the middle class. The reduced levels would continue to benefit the middle class, while some upper-income persons would find their deduction capped.

Ryan was also asked about the Camp proposal to reduce the top 50% of adjusted gross income charitable deduction limit. Ryan did not agree with the Camp proposal. He stated, “I believe we should not have a top cap” on the charitable deduction because the basic function of the deduction is to enable donors to “feed civil society.”

While the 50% limit does provide greater deductions for upper-income persons, it also facilitates the transfer of funds that supports those in need.

Ryan has been supportive of charitable giving to reduce poverty. He focused on reduction of the poverty level in America in his book, The Way Forward: Renewing the American Idea. One of the strategies he proposes is to expand the earned income tax credit to benefit childless workers. This plan is designed to encourage more young single persons to move into the employed category.

Editor’s Note: With the retirement of Ways and Means Chairman Camp, Rep. Ryan is a potential candidate to move into that position in 2015. If Ryan does become Chairman of the Ways and Means Committee, his support of the charitable deduction is favorable for philanthropy.

Bank of America $16.65 Billion Settlement

In a settlement that may help homeowners with up to $7 billion in mortgage relief, the Department of Justice (DOJ) and Bank of America announced resolution of various federal and state claims.

During the 2008 financial crisis, Bank of America agreed to acquire Countrywide Financial Corporation and Merrill Lynch. Both financial organizations originated mortgages and sold billions of dollars of collateralized debt obligations (CDOs). Many of the CDOs and other debt instruments were based on improper valuation of mortgaged homes. There was substantial fraud both in the origination of the mortgages and in the sale of the collateralized securities.

The federal and state claims against Bank of America were resolved with the largest civil penalty in history. Attorney General Eric Holder stated, “This historic resolution – the largest such settlement on record – goes far beyond ‘the cost of doing business.’ Under the terms of this settlement, the bank has agreed to pay $7 billion in relief to struggling homeowners, borrowers and communities affected by the bank’s conduct.”

The principal DOJ Attorney is Associate Attorney General Tony West. He noted, “At nearly $17 billion, today’s resolution with Bank of America is the largest the department has ever reached with a single entity in American history. But the significance of this settlement lies not just in its size; this agreement is notable because it achieves real accountability for the American people and helps to rectify the harm caused by Bank of America’s conduct through a $7 billion consumer relief package that could benefit hundreds of thousands of Americans still struggling to pull themselves out from under the weight of the financial crisis.”

The settlement allocates a $5 billion civil penalty to the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). There also are approximately $11 billion allocated to federal and state claims.

The $7 billion fund for mortgage relief is designed to assist homeowners with mortgage reductions. Because many homeowners still are “underwater” with mortgages greater than the value of the home, they may receive a substantial mortgage reduction under the plan.

Applicable Federal Rate of 2.2% for September -- Rev. Rul. 2014-22: 2014-36 IRB 1 (19 Aug 2014)

The IRS has announced the Applicable Federal Rate (AFR) for September of 2014. The AFR under Section 7520 for the month of September will be 2.2%. The rates for August of 2.2% or July of 2.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2014, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here.

Published August 22, 2014

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